1. Overview
- Incentives apply equally to domestic and foreign investors.
- The major goals of incentives are employment creation, small business development, industrial development, exports, spatial development and the upliftment of previously disadvantaged people.
- The Department of Trade and Industry (DTI) and the Industrial Development Corporation largely administer non-tax incentives.
- Tax incentives are kept to a minimum.
- Tariffs protect local industry, but the average tariff levels have been lowered significantly since 1994 in order to comply with the GATT.
- Export incentives involve an export marketing and investment assistance scheme; export credit and foreign investment reinsurance, and targeting capital exports.
- A total of eleven Spatial Development Initiatives have been identified in South Africa, some of which extend into other SADC countries.
- A number of specific industry sectors and lead projects have been identified under the spatial development strategy.
- Government provides support for technology development.
2. Investment Policy
Government attempts to attract investment in economic activity by creating a stable macro-economic environment. Success has been achieved with regard to issues such as fiscal stability, low inflation, and a commitment to privatisation and the development of free enterprise. Most incentives for investment are in the form of non-tax incentives. Since the 1994 elections, South Africa has attracted more than R30 billion in the form of foreign direct investment, whilst the value of the country's fixed capital stock has increased by R131 billion (at current prices).
Investment South Africa (ISA) is an agency of the DTI that plays a role in marketing investment projects to potential investors. ISA has an online investor database, knowledge of incentives, and a qualified team of people to help potential investors through the regulatory and legislative requirements of investing in South Africa. ISA also maintains communication with provincial development agencies. The provincial development agencies have been set up by the provincial governments to promote the economic development of their provinces. These agencies have emphasised the attraction of investment as a key strategy in provincial economic development. They play a key role in developing the skills and institutional infrastructure that service industrialisation.
3. General Incentives
(i) Electricity tariff concessions
Industries requiring intensive use of electricity may negotiate special tariffs with the relevant local authority and/or the Electricity Supply Commission (Eskom).
(ii) Support programme for industrial innovation (SPII)
This scheme provides support for South African-based products on process development that represent a significant technological advance and that possess a commercial advantage over existing products. Support is in the form of a grant of 50% of actual direct costs incurred in development activity up to a maximum grant amount of R1,5 million per project.
(iii) Technology and Human Resources for Industry Programme (THRIP)
The objectives of THRIP are:
- increasing the base of human resources with appropriate technology skills for industry;
- promoting increased interaction among researchers in industry, higher education and SETIs, with the aim of developing skills for the commercial exploitation of SET; and
- stimulating industry to increase its investment in research, technology development and
- innovation promotion.
The following funding mechanisms are available:
- Firms and THRIP invest jointly in research projects where project leaders are on the academic staff of South African higher education institutions.
- THRIP matches investment by industry in projects where SETI-based researchers/experts serve as project leaders and students are trained through the project.
- TIPTOP (Technology Innovation Promotion through the Transfer of People) schemes provide mechanisms to promote the mobility of researchers and students between the industrial participants within defined THRIP projects.
A total number of 1 053 students were supported by THRIP in 1996/97 and the total value of approved projects amounts to R58,3 million in 1996/97, representing an increase over the previous year of 255%.
(iv) Rebate provisions
These are available to all manufacturing industries. Provision exists for rebate or drawback of certain duties applicable to imported goods, raw material and components used in manufacturing, processing or for export.
(v) Incentives for the small business sector
The South African government is well aware of the important role that small, medium and micro enterprises (SMMEs) play in job creation and innovative new production methods. Consequently, the Centre for Small Business Promotion (CSBP) was established within the DTI to administer small business promotion.
The CSBP relies on close co-operation between the National Small Business Council (NSBC); the Ntsika Enterprise Promotion Agency (Ntsika); Khula Enterprise Finance Limited (Khula); the provincial SMME desks; and regional development corporations to operationalise its different support strategies.
Specific incentives include the following:
(i) Non-financial support through Ntsika, which mainly involves training, service provision, targeted assistance, the forging of business linkages, and the provision of information and research.
(ii) Small/Medium Manufacturing Development Programme (SMMDP)
This DTI programme is available to local and foreign firms investing up to R3 million in land, buildings, plant and equipment to encourage small and medium-sized manufacturing and to facilitate increased employment creation.
This incentive package provides for:
- an establishment grant payable for three years, worth 10,5% of qualifying assets;
- profit/output incentive, calculated at 25% of profit before tax, payable for an additional year;
- an additional two-year profit/output incentive provided the industrialist can meet or exceed the human resource remuneration to value-added ratio of 55% measured in the fourth financial year;
- a foreign investment grant to overseas companies investing in new machinery and equipment to establish new projects in RSA.
(iii) Standard Credit Guarantee Scheme
This scheme is available from Khula Enterprise Finance Limited (Khula) to increase the access SMMEs have to finance from banks. It is available to independently-owned SMMEs with assets worth less than R2 million that meet the banks' normal lending criteria, for establishing, expanding or acquiring a new or existing business.
(iv) Emerging Entrepreneur Scheme
This scheme, available from Khula, is available to independently-owned SMMEs with assets worth less than R2 million that meet the banks' normal lending criteria, for establishing, expanding or acquiring a new or existing business.
(v) Business Loans for Retail Financial Intermediaries (RFIs)
This scheme is available to RFIs who meet Khula's development and institutional criteria. The aim of the scheme is to provide business loans to RFIs with funding for or lending to SMMEs.
(vi) Seed loans for RFIs
This scheme by Khula aims to provide initial capital to new organisations to initiate their portfolio; and to fund operational expenses over a predetermined period.
(vii) Capacity Building Support for RFIs
The aim of this programme by Khula is to provide capacity-building support to new RFIs to initiate a loan portfolio, or existing RFIs to expand their loan portfolios.
4. Free Trade Zones
The South African government is wary of conventional export processing zones (EPZs) where fiscal incentives are offered, but labour rights may be repressed and environmental standards may be loosened. The DTI has investigated these types of EPZs and is of the opinion that in many cases foreign investors have indicated that these types of incentives are not significant in influencing their locational decisions.
The DTI has decided to rather opt for Industrial Development Zones (IDZs). They are designed to attract Foreign Direct Investment (FDI) for export-oriented manufacturing production and will be located within designated SDI regions so as to maximise the natural linkages between these two programmes.The incentives the DTI will offer are targeted at those areas identified as critical to foreign investors.
These include the:
- Institutional framework:
A dedicated national IDZ authority will be established to oversee the development of these zones. The responsibility of this body will be to develop appropriate policy, set national investor guidelines and determine the designation of new zones. The development of the zone will be the responsibility of an IDZ development company/corporation, responsible for all aspects of project development and ongoing IDZ management. This may take the form of a joint public/private investment venture.
- Administrative support:
A dedicated IDZ administrative unit will be based in each of the zones and will include a 'one-stop' regulatory and approval service, including fast and predictable investment approval procedures, a dedicated customs service providing single window clearance, and marketing and information centres.
- Advanced labour relations:
South Africa's legacy of inward-led industrialisation, job reservation and other apartheid policies also contributed to the systematic exclusion and under-development of the country's human resources. IDZs will have a specific strategic human resource component, aimed at facilitating advanced labour relations and developing human resource capacity. These could be based in the IDZ administrative unit and should include advanced dispute resolution facilities (CCMA), strategic human resource development capacity including a formal framework for skills development agreed between the Department of Labour and DTI, the creation of a training fund and the provision of training facilities and recruitment services.
- Incentive structure:
The incentive structure that will be offered to investors essentially contains no additional items to those offered under existing policy and incentive schemes. The incentive structure thus involves the 'packaging' of existing incentives and support measures, to enable these measures to more adequately support the IDZ objectives. These include fiscal incentives (six-year tax holiday and accelerated depreciation allowance), rebate item 470.03 of the Customs and Excise Act, exemption of VAT on inputs of IDZ companies sourced from the domestic economy and for export processing purposes, exemption from property and local taxes within the IDZ, automatic and unrestricted access to duty-free inputs (rebate item 360.01) as well as other export incentives (EMIA, Short-term Export Finance Guarantees, Export Credit Guarantees, and bilateral and multilateral market access arrangements).
- Regulatory mechanisms:
International trends indicate that investors are seeking highly productive and efficient productive platforms rather than unregulated environments, particularly in higher value-added manufacturing activity. There will therefore be no relaxation of any regulatory mechanisms applicable to these zones.·
5. Export Incentives
Two major export incentive schemes are operational in South Africa:
(i) The Export Marketing and Investment Assistance Scheme (EMIA)
The purpose of assistance under the EMIA scheme is to partially compensate exporters for certain costs incurred in respect of activities aimed at developing export markets. The following EMIA schemes qualify for support:
- Primary export market research
- Outward-selling trade missions
- Inward-buying trade missions
- Exhibition assistance
- Assistance to industry-specific sectors
- Outward investment recruitment missions
- Inward investment missions
- Foreign direct investment research
Inter alia the following criteria apply:
- Past export/production performance of the applicant.
- Potential export/production capacity and the extent of export planning.
- Type of product for export and local marketing performance.
- Level of labour absorption, location of venture and technological requirements.
- Industry in which the venture is planned.
Any assistance provided under the EMIA schemes is at the absolute discretion of the Director-General of Trade and Industry, whose decision will be final.
(i) Export Credit and Foreign Investment Reinsurance (ECRS)
The DTI recognises that exporters face multiple risks when pursuing export opportunities. The objective of Export Credit and Foreign Investment Reinsurance is to promote trade with countries outside the Republic of South Africa by making provision for reinsurance with the Government of the Republic for insurance contracts in connection with export transactions and export credit loans or similar facilities in coherence with suchlike transactions.
Export Credit and Foreign Investment Reinsurance is offered in terms of the Export Credit and Foreign Investment Reinsurance Act. All facilities are available through Credit Guarantee Insurance Corporation of Africa Limited (CHIC). All insurance policies in this regard are issued by CGIC. Where applicable, facilities are reinsured with the DTI.
Five different facilities are available:
1. Short-term insurance.
2. Medium/long-term insurance.
3. Export finance for capital goods or projects.
4. Foreign investment guarantees.
5. Export finance guarantees for SMMEs.
6. Financial Assistance
Most forms of financial assistance to sizeable capital investment projects are administered by the Industrial Development Corporation (IDC), which was established in 1940 to promote and guide undertakings that benefit the economy.
The IDC does not normally seek equity participation but will consider doing so if invited. It does not wish to involve itself in the management of the companies to which it provides loan financing and will request board representation only if an appreciable shareholding is taken up. The viability of projects is essential, and applications are fully investigated before approval. Financing for normal industries is provided with commercial conditions applying to interest rates and security. The IDC will not provide a disproportionate amount of total project financing unless exceptional circumstances dictate otherwise. (Please see industry incentives below for a list of the individual incentives on offer by the IDC and other organisations).
7. Regional Incentives
The methodology behind South Africa's regional development strategy was briefly discussed in chapter 2. General investment incentives apply equally to urban and rural areas, but in the case of Spatial Development Initiatives (SDIs), additional incentives are available through a variety of government support services, particularly with regard to the provision of basic infrastructure. Furthermore, each SDI is designed around at least one key anchor project funded by the IDC.
The following SDIs have been identified in South Africa:
- Platinum SDI near Rustenburg, North-West Province (industry, agriculture, tourism).
- Gauteng SDI (multi-sectoral).
- Phalaborwa SDI (mining, agriculture, tourism).
- Maputo Development Corridor (road building and multi-sectoral).
- Lubombo SDI in KwaZulu-Natal (agri-tourism).
- Richards Bay SDI (mining, industry, tourism).
- KwaZulu-Natal SDI in Durban (industrial, tourism).
- Wild Coast SDI (agri-tourism).
- Fish River SDI (industrial).
- West Coast Investment Initiative (tourism, fisheries, agriculture, industry).
- Coast to Coast SDI, linking Johannesburg with Windhoek and Walvis Bay in Namibia (road-building and multi-sectoral).
8. Industrial Financing
In addition to normal commercial avenues of financing through a sophisticated financial sector, the following financing schemes are available through the IDC:
1. Medium-term normal loan financing at fixed or variable interest rates. The objective is to encourage the establishment of new and/or the expansion of existing industries.
2. Job scheme. The scheme provides low interest loans to any company creating at least ten new jobs at a capital cost per job of R100 000 or less.
3. Orchards scheme. The objective is to establish orchards and other farming infrastructure like dams, canals, irrigation systems etc. It makes provision for low interest loans to any individual farmer or to a group of farmers for a joint scheme, which is administered by a co-operative or other acceptable body. Orchards covered are citrus, deciduous and sub-tropical, and at least 10 new jobs at a capital cost per job of R100 000 or less need to be created to qualify.
4. Import finance, to assist local importers of capital goods.
5. Tourist development scheme. The objective is the development, improvement and/or expansion of tourist facilities in game parks and conservation areas; the renovation, refurbishment and extension of existing accommodation facilities throughout South Africa; the development of select new accommodation facilities with potential; and other capital intensive tourism projects, which could have a significant impact of the growth of the tourism industry and require medium to long-term finance. Financing is tailored to suit individual needs aimed at the development of new projects as well as the expansion of existing facilities.
6. Venture capital scheme. The objective is to stimulate the development of new products with sound growth potential. A financing package is available, which can include a stakeholding by the IDC.
7. Scheme for entrepreneurial finance and economic empowerment. The purpose is to assist new entrepreneurs or historically disadvantaged people (HDPs) to gain access to mainstream economic activities. Manufacturing business usually requires owner funding of at least 33% to 40% of the total funding to ensure long-term viability. The scheme provides for a reduced contribution, with the IDC providing a larger than normal contribution of the project funding.
8. Takeover and acquisition scheme. The purpose is to assist HDPs in acquiring a significant stake in an industrial concern to a maximum of R100 million per project.
9. Consortium finance scheme, aimed at assisting empowerment groups to increase their equity base.
10. Wholesale finance scheme for HDPs. This scheme is available to companies or franchises for on-lending to emerging entrepreneurs. It has to involve a minimum of ten projects and a minimum project value of R500 000.
11. Low interest rate empowerment scheme for HDPs. The access criteria include black control and management, with a minimum of R200 000 and a maximum of R40 million.
12. Fish harvesting scheme for HDPs, which provides finance for the acquisition of fishing vessels and equipment and working capital.
13. Cleaner production scheme. This scheme provides finance for acquisition of fixed assets to control/abate pollution, protect environment, safeguard exports (at normal interest rates).
14. Midi projects initiative. The purpose is to stimulate the establishment of new, internationally competitive medium-sized industrial manufacturing projects. This is done through financing and knowledge-based inputs with respect to establishment of viable industrial projects with funding needs between R10m and R500m that are competitive internationally.
9. Development Programmes And Incentives For Specific Industries
In addition to the financial incentives for specific industries and groups discussed above, the DTI administers the following industry-specific incentive schemes:
1. Motor Industry Development Programme. This scheme enables local vehicle and component manufacturers to increase production runs and encourages rationalisation of the number of models manufactured by way of exports and complementing imports of vehicles and components.
2. Particular industries that have been participating as lead projects in SDIs may also qualify for various non-tax support measures.
10. Tax
10.1. Rates
Rates of taxes are fixed annually by parliament for the different category of taxpayers. Neither SARS nor any other person has a discretion to change these rates.
10.2. Deferral Period
In terms of the definition of “gross income” tax is levied on the earlier of when an amount is received by a taxpayer or when its accrues. Case law exists to the effect that the SARS has not authority when to tax an amount, but has to tax on the earlier of receipt or accrual.
Specific provisions may provide for limited relief. For example, when an amounts is received or it accruals, but future expenditure still need to be incurred in respect of the amount so received, the whole amount will not be taxed in year one. Under s 24C a deduction is available for future expenditure still to be incurred.
10.3. Tax Holiday
In an attempt to stimulate general manufacturing investments, a tax holiday was granted to certain qualifying companies. In other words, the taxable income of these companies was taxed at a zero rate. To qualify for the tax holiday an application had to be lodged by 30 September 1999.
10.4. Depreciation
Additional industrial investment allowance (S 12G)
In an attempt to stimulate investment, qualifying strategic industrial projects are entitled to an additional tax allowance.
The incentive package in effect comprises a double deduction, in that an additional allowance - over and above existing allowances - is provided for on investments in industrial assets. To qualify for the allowance a project must be regarded as a strategic industrial project. In essence, an industrial project is:
- the manufacturing of any products, goods, articles or things (other than tobacco or tobacco-related products);
- computer and computer-related activities; or
- research and development activitiesas defined in the section or in the regulations issued under the section.
Only projects meeting the requirements as specified in section 12G will be approved. From these requirements it is clear that the incentive is aimed at large investments. The amount that qualifies for deduction is a specified proportion of the cost of investment in industrial assets.
Industrial assets are:
- plant and machinery not previously used, qualifying for deduction under section 11(e) or 12C(1),
- brought into use within three years after approval, in an industrial project in SA; and
- buildings or improvements to buildings, not previously used, qualifying for deduction under section 13(1)(a), (d) or (f), brought into use within three years after approval, used wholly or mainly for carrying on a process in which the plant and machinery referred to in the previous paragraph is used.
Metrics for the various criteria are set out in regulations recently issued. Based upon the metrics, points are awarded to a proposed project. Potentially 10 points may be awarded. A project scoring 6 or more points is regarded as a qualifying industrial project with preferred status and a project scoring 4 or 5 points is regarded as a qualifying industrial project. Where the project has preferred status, the taxpayer may deduct 100% of the cost of the asset in the year in which it is first brought into use. However, the deduction is limited to the lesser of the amount of the assets reflected in the application for approval or R600 million. In all other cases the taxpayer may deduct 50% of the cost of the asset, limited to the lesser of the amount of the assets as reflected in the application for approval, or R300 million.
An important proviso is that the allowance may only be claimed against income from the project, and not against income from any other trade.Provision is made for the retrospective withdrawal of approval in certain specified circumstances, largely relating to the reliability of assertions contained in the original application. On withdrawal the “triple tax” rule will be imposed.
Section 12i Tax Allowance Incentive
Section 12i of the Income Tax Act is a tax allowance programme based on investment in new manufacturing assets and training, provided to employees in the project. The 12i Tax Incentive aims to accelerate economic growth in the industrial sector and support the Industrial Policy Action Plan (IPAP 2), particularly in terms of job creation, training and energy efficiency. The two components of the programme comprise an investment allowance of up to a maximum of R900 million, and a training allowance of up to a maximum of R30 million per project, dependent on compliance with certain criteria. Both allowances are deductible from the taxable income of the applicant company, thereby reducing their tax liability.
Clothing and Textile Competitiveness Improvement Programme (CTCIP)
The Clothing and Textile Competitiveness Improvement Programme (CTCIP) aims to build capacity among manufacturers and in other areas of the apparel value chain in South Africa, to enable them to effectively supply their customers and compete on a global scale. Such competitiveness encompasses issues of cost, quality, flexibility, reliability, adaptability and the capability to innovate.
Production Incentive (PI)
The Production Incentive (PI) forms part of the overall Clothing and Textile Competitiveness Programme (CTCP) and flows from the implementation, by the Department of Trade and Industry (the dti), of customised sector programmes (CSPs) for the clothing, textiles, footwear, leather and leather goods industries. The PI Guidelines seek to enable companies to present their business cases to the CTCP Desk of the Industrial Development Corporation (IDC). They also provide a framework for the CTCP Desk to evaluate such cases.
Automotive Investment Scheme (AIS)
The Automotive Investment Scheme (AIS) is an incentive designed to grow and develop the automotive sector through investment in new and/or replacement models and components that will increase plant production volumes, sustain employment and/or strengthen the automotive value chain. The Minister of Trade and Industry, Dr Rob Davies, approved the AIS Programme Guidelines on 12 May 2010, following consultation with relevant stakeholders in the industry.
Enterprise Investment Programme (EIP)
The Minister of Trade and Industry, Dr Rob Davies (MP), has approved the revised guidelines pertaining to the Enterprise Investment Programme (EIP) and its sub-programmes, the Manufacturing Investment Programme (MIP) and Tourism Support Programme (TSP).
Black Business Supplier Development Programme (BBSDP)
The Black Business Supplier Development Programme (BBSDP) is a cost-sharing grant offered to black-owned small enterprise to assist them to improve their competitiveness and sustainability in order to become part of the mainstream economy and to create employment. BBSDP provides a grant to a maximum of R1 000 000 (R800 000 will be ring-fenced for tools, machinery and equipment) per eligible enterprise to improve their corporate governance, management, marketing, productivity and use of modern technology.
Critical Infrastructure Programme (CIP)
The Critical Infrastructure Programme (CIP) is a non-refundable scheme that covers between 10% and 30% of the total development costs of the qualifying infrastructure. The cash grant is made available to the approved beneficiary upon the completion of the infrastructure project. Infrastructure for which funds are required is deemed to be 'critical': if the investment would not take place without the CIP funding contribution; if the infrastructure projects would be executed without the CIP contribution; if it can be proven that it would be of a smaller scale or lower quality; or it would be established at a later stage than the period than when it was intended.
Business Process Outsorcing and Offshoring (BPO and O)
The Business Process Outsourcing & Off-shoring (BPO&O) investment incentive comprises an Investment Grant ranging between R37 000 and R60 000 per seat and a Training Support Grant towards costs of company specific training up to a maximum of R12 000 per agent. The incentive is offered to local and foreign investors establishing projects that aim primarily to serve offshore clients. The objective of the incentive is to attract BPO&O investments that create employment opportunities. The grant is provided directly to approved projects depending on the value of qualifying investment cost and employment creation.
Sector Specific Assistance Scheme (SSAS)
The Sector Specific Assistance Scheme is a reimbursable 80:20 cost-sharing grant whereby financial support is granted to Export Councils, Joint Action Groups and Industry Associations. The purpose is to enable the funding; in respect of Generic Funding and Project Funding for Emerging Exporters; of non-profit business organisations in sectors and sub-sectors prioritised by the dti. , which aims to assist local film producers in the production of local content. The Film Production incentive is intended to increase local content generation and improve location competitiveness for filming in South Africa.
The Co-operative Incentive Scheme (CIS)
The Co-operative Incentive Scheme (CIS) is a 90:10 matching cash grant for registered primary co-operatives (a primary co-operative consists of five or more members). The CIS is an incentive for cooperative enterprises in the emerging economy to acquire competitive business development services and the maximum grant that can be offered to one co-operative entity under the scheme is R35 which aims to attract foreign-based film productions to shoot on location in South Africa; and the South African Film and Television Production and Co-Production Incentive
Film Production Incentive
The Film Production incentive comprises the Foreign Film and Television Production Incentive which aims to attract foreign-based film productions to shoot on location in South Africa; and the South African Film and Television Production and Co-Production Incentive, which aims to assist local film producers in the production of local content. The Film Production incentive is intended to increase local content generation and improve location competitiveness for filming in South Africa.